If the oil market had a theme song right now, it’d probably be “Slide.” Or maybe “I’m Goin’ Down” by Bruce Springsteen. Or, if the traders of NYMEX were feeling particularly introspective, they could go for David Bowie’s “Always Crashing in the Same Car,” since oil busts tend to have a sense of déjà vu about them. In any case, the price of crude has continued its descent this week, with the U.S. benchmark variety, West Texas Intermediate, now trading for less than $50 a barrel. Brent, which is used to set prices internationally, isn’t far behind, trading at around $51.
The basic story driving prices hasn’t changed much. The world has a glut of oil, and the market is anticipating that American stockpiles are getting ready to grow. But the $50 mark is significant, because we seem to be reaching the average price at which a great deal of the world’s oil producers—notably, in Russia—break even on their investments in wells. If it goes much lower, a lot of oil is about to become outright unprofitable, as shown on the graph below from Morgan Stanley. That doesn’t mean companies will suddenly stop pumping crude that they’ve already drilled; it just suggests they won’t recoup their costs.
So it’s not a great time to be ExxonMobil. But it’s an even worse time to be a petro-state—especially if your president is named Vladimir Putin. While Russia managed to momentarily stabilize its fragile currency at the end of 2014 with a handful of emergency measures, oil’s decline has quietly pulled the ruble’s value back down, weakening the government’s ability to cover a looming budget deficit while keeping its banks—cut off as they’ve been from world financial markets through sanction—on life support. Meanwhile, credit ratings agencies are reportedly on the verge of downgrading the country’s debt to junk, which would force some investment funds to automatically dump it, further crippling the currency in the process. I could be especially corny and suggest Putin will be singing the “Crude Oil Blues,” except that track is terrible.